Published on: December 9, 2024
RBI’S MONETARY POLICY UPDATES (DECEMBER 6 2024)
RBI’S MONETARY POLICY UPDATES (DECEMBER 6 2024)
Cash Reserve Ratio (CRR) Cut
- Announcement: CRR slashed by 50 basis points (bps) to 4% (from 4.5%).
- What is CRR:
- Percentage of a bank’s total deposits maintained in liquid cash with the RBI.
- Banks do not earn interest on this reserve.
Why CRR Was Cut
- Boosting Liquidity:
- Frees ₹1.16 lakh crore in the banking system.
- Augments banks’ lendable resources, fostering credit availability.
- Economic Challenges:
- Tightened liquidity due to RBI’s actions to stabilize the rupee and large dollar sales.
- Liquidity pressures increase due to advance tax payments, GST, and quarter-end credit demand.
- Impact:
- Banks can lend surplus funds, spurring economic growth.
- Potential benefits for borrowers if banks pass on the CRR cut.
Repo Rate Decision
- Current Repo Rate: Unchanged at 6.5%.
- Significance:
- 11th consecutive monetary policy keeping the rate steady.
- Majority decision (4-2) indicates differing views within the Monetary Policy Committee (MPC).
- Reasons:
- Persistent food inflation pressures.
- Need for durable price stability to secure long-term growth.
Impact on Borrowers
- Positive Impact:
- Repo-linked external benchmark lending rates (EBLRs) remain steady, preventing an increase in EMIs.
- Mixed Impact:
- Liquidity surge may lead to marginally lower deposit rates.
- Interest rates linked to the marginal cost of fund-based lending rate (MCLR) may rise.
GDP Growth Forecast Revision
- Revised Forecast:
- FY25 GDP growth estimate reduced to 6.6% (from 7.2%).
- Reasons for Reduction:
- Economic slowdown in the second quarter.
- Real GDP dropped to 5.4% in July-September 2024 (lowest in seven quarters).
- Positive recovery signs from festive demand and rural consumption.
Inflation Forecast
- Revised Estimate:
- FY25 retail inflation forecast increased to 4.8% (from 4.5%).
- Key Reasons:
- Consumer Price Index (CPI) inflation rose to 6.21% in October 2024 (highest in 14 months).
- Inflation consistently above RBI’s target, limiting room for rate cuts.
Implications for the Economy
- Liquidity Management:
- CRR cut enhances banks’ credit capacities, supporting growth.
- Balancing inflation and growth remains a challenge.
- Policy Stance:
- MPC retains a “neutral” stance to respond flexibly to evolving economic conditions.
Outlook
- Growth Challenges: Recovery hinges on sustainable demand and investment.
- Inflation Control: Persistent focus on maintaining price stability amidst global and domestic pressures.